Wednesday, November 5, 2008

WASHINGTON -- Congressional Democrats plan to use their widened majority to push quickly for a broader government role in financial markets, citing Tuesday's election as a repudiation of years of Republican deregulatory policies.

House Financial Services Chairman Barney Frank said in an interview that he is weighing tougher rules on shareholder rights and stricter conditions on the $700 billion financial rescue package.

Mr. Frank added that a central point of Democrats' plans would be the creation of a "systemic-risk regulator." It could have unprecedented powers over a wide range of financial institutions, from insurance firms to hedge funds, with responsibility for protecting the soundness of the whole financial system, not just one sector. He likened that to the establishment of the Securities and Exchange Commission, charged with maintaining fair markets and investor protection, five years after the market crash of 1929.

In a separate interview, Sen. Charles Schumer (D., N.Y.) said Congress would try to redraw supervision of financial markets completely in the first six months. "Whether the economy was in tatters or not, we need a new system of regulation," said Sen. Schumer, a leading member of the Senate Banking Committee.

While financial-services companies are braced for more-assertive government oversight, Mr. Schumer added that Capitol Hill's reworking of market rules could also give banks some victories. He said Democrats would be willing to consider easing limits that currently prevent banks from holding more than 10% of U.S. deposits after an acquisition. Any change to this policy could free up huge institutions such as Bank of America Corp., Wells Fargo & Co. or J.P. Morgan Chase & Co. to pursue more acquisitions.

Mr. Schumer acknowledged that some Democrats were worried about being accused of regulatory overreach. Democrats are "very mindful of the fact that too much regulation will snuff out the hallmark of our economy, which is entrepreneurship," he said. "You are going to find that balance."

The day after the big Democratic win, the stock market fell sharply, a reminder of the volatile economic environment that the party in power will be facing.

Mr. Frank added that a central point of Democrats' plans would be the creation of a "systemic-risk regulator." It could have unprecedented powers over a wide range of financial institutions, from insurance firms to hedge funds, with responsibility for protecting the soundness of the whole financial system, not just one sector. He likened that to the establishment of the Securities and Exchange Commission, charged with maintaining fair markets and investor protection, five years after the market crash of 1929.

In a separate interview, Sen. Charles Schumer (D., N.Y.) said Congress would try to redraw supervision of financial markets completely in the first six months. "Whether the economy was in tatters or not, we need a new system of regulation," said Sen. Schumer, a leading member of the Senate Banking Committee.

While financial-services companies are braced for more-assertive government oversight, Mr. Schumer added that Capitol Hill's reworking of market rules could also give banks some victories. He said Democrats would be willing to consider easing limits that currently prevent banks from holding more than 10% of U.S. deposits after an acquisition. Any change to this policy could free up huge institutions such as Bank of America Corp., Wells Fargo & Co. or J.P. Morgan Chase & Co. to pursue more acquisitions.

Mr. Schumer acknowledged that some Democrats were worried about being accused of regulatory overreach. Democrats are "very mindful of the fact that too much regulation will snuff out the hallmark of our economy, which is entrepreneurship," he said. "You are going to find that balance."

The day after the big Democratic win, the stock market fell sharply, a reminder of the volatile economic environment that the party in power will be facing.

Democrats face pressure to address problems in multiple industries, not just banking. House Speaker Nancy Pelosi said Wednesday that Congress may have to provide additional assistance to auto makers. "We may need to make a statement of confidence in our auto industry but in a way that says we're going forward with new green technologies," she told National Public Radio.

Although Speaker Pelosi wasn't specific, Democratic Sen. Debbie Stabenow of Michigan said Wednesday that congressional leaders are considering doubling the low-cost loans to be offered to ailing auto makers to $50 billion as part of a second economic-stimulus package. A second package of loans would be on top of the $25 billion in credits signed into law this fall and earmarked to help auto makers retool plants to produce new, fuel-efficient vehicles. Those loans haven't been released yet.

President-elect Barack Obama, while on the campaign trail, had echoed many of the financial-industry changes congressional Democrats are expected to push, including a new regulatory structure and new rules for executive compensation. It is unclear whether his administration will let Congress drive such overhauls or will want to take control of some of the bigger issues itself. Sen. Obama is still putting his economic team together.

"If you wanted to look at the single largest factor in turning the election, its no doubt it's the economy," said Andy Laperriere, a managing director at ISI Group, a brokerage firm. "That gives Democrats a mandate to try to address that problem, but I'm not so sure that voters necessarily voted for a substantial shift in terms of endorsing much broader government regulation."

New RestrictionsDemocrats are expected to push for new restrictions on a broad group of loan products that financial institutions can issue. "We have to continue the process that we began last year of banning the bad subprime loans, but there will be other bad loans," Mr. Frank said. "You can't just ban the bad subprime loans." He didn't specify which products, but Democrats are expected take up legislation restricting certain credit-card practices.

According to Democratic aides, one of the first moves Congress is likely to address is tightening standards on executive compensation at firms receiving federal money as part of the bailout. However, it's also possible such standards could be dealt with by the Obama administration's Treasury secretary rather than Congress.

"One area that sticks in everybody's craws are the pay-for-failure packages," said Patrick McGurn, special counsel at RiskMetrics Group, a proxy advisory firm. "We could see strong language there in terms of shareholder-approval requirements."

Mr. Frank said Democrats would look to continue their broad push for more scrutiny of executive pay. He said those efforts wouldn't involve setting a "dollar amount" but might try to alter certain incentives that companies use to set compensation.

Last year the House passed a Frank-sponsored bill that would have given shareholders an advisory vote on executives' pay. Sen. Obama introduced an identical bill in the Senate the same day, but the Senate didn't take it up. It's expected that Rep. Frank will push the bill again.

The so-called say-on-pay bill, which has been opposed by business groups, may gain support as a compromise with those who are seeking more direct congressional involvement in setting executive pay.

The SEC has already warned companies that further changes could be afoot. Compensation committees at institutions getting federal capital injections in the bailout are required to review pay plans to make sure they don't promote excessive risk-taking. A senior SEC official recently suggested that all companies take that into consideration.

Considering ConsolidationBeyond the possible creation of a systemic-risk regulator, lawmakers are considering consolidation of some financial regulators. This will likely depend on the views of the Obama administration.

One possible scenario would be merging the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which regulates savings and loans. The OTS has lost clout in recent months as two of its top institutions, IndyMac Bank and Washington Mutual Inc. have failed. Its top official, John Reich, hasn't indicated whether he plans to stay past January.

SEC Chairman Christopher Cox, who is expected to leave in February, has pushed for his agency to be merged with the Commodity Futures Trading Commission. Such a move could make it easier for lawmakers to set tougher limits on complex financial products such as credit-default swaps, which are under much more scrutiny amid the financial turmoil.

The banking industry was already bracing for a tough 2009, and it lost one of its key allies Tuesday. Rep. Tom Feeney (R., Fla.), a top defender of the banking industry during the economic crisis, was defeated in his re-election bid. Rep. Feeney was in the rare position of serving on both the Financial Services Committee and the Judiciary Committee, panels where Democrats were pushing for some of the biggest controls over banks.

"It will be a very active 2009 for the financial-services industry," said Scott Talbott, the top lobbyist for the Financial Services Roundtable, an industry group. "We'll be playing offense and defense."

Write to Damian Paletta at damian.paletta@wsj.com and Kara Scannell at kara.scannell@wsj.com